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From being money guzzlers to turning cash cow: eCommerce players bring profitability at forefront

eCommerce players would also need to look at improving operational efficiency with renewed focus on the determinants of distribution, warehousing and logistic costs.

Tags: eCommerce, Jabong, e-tailing, logistical infrastructure, KPMG, overcart, marketplace, StoreHippo,

BY Aparajita Choudhury  |  May 16, 2015 comments ( 0 ) |

Any new venture or a new sector takes time to shape, evolve and become profitable or sustainable. The eCommerce sector is also in the same phase and will take time to attain success. As the companies move ahead, they would need to have clear paths to profitability while balancing future scale.

Experts believe that focus on providing value additions to customers beyond price is something which can help eCommerce companies turn profitable. Discounting strategy does not always work for all categories of products because sometimes the like-minded shopaholics do not prefer to go for deals, but buy products online for reasons like - selection and convenience.

"eCommerce players will have to ensure that the depth of assortment on the website and the multiplicity of options available are maintained, so customers can be retained. Discounting is expected to continue, but with necessary capping," says Praveen Sinha, Founder, Jabong.

Expressing his views on the strategy for retaining customers, Ashish Jhalani, Founder, e-tailing, shares, "eCommerce players would have to switch to providing value beyond the discount to the customers - such as convenience, product selection, product knowledge/education, etc. eCommerce players would need to build very strong customer loyalty programs, where existing customers can be provided extra value in their next purchase or even their search."

Profitability still remains a concern

Though eCommerce companies are creating ripples across the industry gaining significant customer mindshare towards online shopping, they are yet to master the art of profitability. Both horizontal and vertical players are in the tug of the war to attain number one spot using marketing as a tool as well as making significant investments in building out services, infrastructure, and technology to make the shopping experience seamless for customers.

"Last mile delivery and logistics in India is a huge barrier to growth, especially from a profitability perspective.  The return rate of products in India is between 5 per cent and 25 per cent and most of it is driven by lack of logistical infrastructure, which alone accounts for $350 million of returned goods in 2013 and $700 million in 2014," said Saptarshi Nath, Co-founder, Overcart.

Rajiv Kumar, CEO & Founder of StoreHippo.com highlights some of the crucial factors that are preventing eCommerce players to grow:

Competition: Too many players and high competition in the retail segment is a cause of concern.

Logistics & Supply Chain: The big players set up their own logistics companies, but the smaller retailers depend upon the efficiency of the available players in the market.

Payments: Payment gateway error rates are high (25 per cent of transactions fail at the gateway).  Some payment gateways and banks charge too much commission on each transaction, which is bad for smaller players. Payment fraud is another concern in online transactions.

Cash on Delivery (CoD): Most of the customers in India opt for Cash on Delivery. This adds up the cost of the retailers. This huge dependency on cash-on-delivery model is proving to be costly for the eCommerce players who offer this mode of payment. This additional cost climbs up in case the product is returned by the customer.

Tax: For eCommerce industry, inter and intra-state movement of goods are most common and these transactions are more particularly in buy and sell model. The basic taxes are the Value Added Tax (VAT), which is charged by the state government on the products sold within a State and Central Sales Tax (CST), which is charged by Central government at cross border sale transactions. Tax structure is complex and affects business growth.

Cultural Restraints: Many people believe that touch and feel factor is very important before buying a product, which is missing in online sector.

Today, eCommerce companies cannot afford to lose focus on revenue growth for which customer acquisition is paramount. However, the retention strategy needs to be as aggressive to help optimise the acquisition costs, which are very high. "The organisations would also need to look at improving operational efficiency with renewed focus on the determinants of distribution, warehousing and logistic costs," said Ashvin Vellody, Partner-Advisory, KPMG.

Building sustainable model

eCommerce business is globally a proven model and many investors who have been part of eCommerce in other parts of the world know the potential that Indian eCommerce has. "Companies are working towards systemic improvements in fulfilment process to minimise the cost of delivery, while ensuring to delight the customers, stabilise discounts and coupons, and optimise customer acquisition cost," said Sinha.

Excessive fund flow over the last couples of years has led to the scorching growth of this industry. However, trading off some growth for profitability signals an alarm of uncertainty in the growth story. "There is a trade-off between growth and profitability. Over the last few years, aggressive discounting has enabled rapid growth despite the challenges in terms of trust, internet speed and availability, card usage, delivery infrastructure etc. If discounts are tapered down in the interest of profitability, then the growth rate shall also slow down," said Vivek Mathur, CEO, Giftease Technologies.

Most companies have burned their money on building the online marketplace (providing large discounts, building infrastructure like technology, logistics, etc.) rather than focusing on scaling up the business. Maintaining balance between growth and profitability will be the key strategy of eCommerce players.

How to reduce cost?

Positive sentiment towards improving economic units can enable eCommerce players to add value propositions to the growth story and this will come by retaining customers and increasing marketplace commissions.

Here are some of the clear pathways on how to reduce costs:

1) Choose products wisely. Avoid selling products that don't generate enough profit.

2) Offer free shipping with a minimum purchase order value. Avoid offering free shipping with a minimum number of purchased items because in that case, the customer may buy low-priced items just to qualify for free shipping.

3) Find the right sponsors for your eCommerce business. Sell ad space on your website and earn extra revenues. It's usually a good trade for both sides.

4) Use social media to promote your eCommerce business. One can generate profit by pay-per-click advertising. Digital marketing is a cost-effective way to reach your audience.

5) Issuing invoices by email and getting paid with the help of online payment gateways, helps in saving on operational costs.

6) As an eCommerce business owner, recycling packaging can be very effective for cutting down operational costs in the long run.

The euphoria will continue

eCommerce sector has seen significant growth by virtue of increased penetration of smartphones and wider internet availability. As per the industry experts, the sector will start making operating profits by 2020. According to UBS research study, Indian e-tail market will grow 10 times by 2020 to $50 billion. This projection is based on a study of the accessibility, internet penetration, affordability, income levels and adaptability by different categories and accountability.

"Even though the market is growing tremendously and lot of funding is taking place in the space. I believe there is still reluctance due to the lack of clarity. If rules and regulations are clearly defined, there would be lot more international companies and investors looking at the eCommerce space," said Jhalani.

The market is under-penetrated as of now and there is a lot of scope for expansion in terms of geography, customer segment, product categories. The models would keep evolving. Investors as well as eCommerce players understand this and are focusing on building a sustainable model while jockeying for position.

Path to profitability

Doing business in India has never been easy. But things are changing for the better. It is only a matter of time that statutory hurdles will be a thing of the past. The only hype will remain in the valuations of these companies. Moreover, eCommerce companies will have to delicately take steps towards the path of profitability because taking any drastic steps now, may jeopardize what they have diligently built over the past few years.

eCommerce is solving the fundamental supply chain problems pertaining in the tier II and III cities and thereby, democratising shopping in India. With increased focus on mobile, companies are now reaching out to shoppers in every nook and corner. However, the rate of growth of the industry is still staggering and companies will continue to pump money into this sector.

"We have to keep in mind that the Indian legal framework is not designed for eCommerce and it will take some growing pains before right legal and financial frameworks are in place.  The tax hurdles eCommerce faces in India are no different from the issues Amazon faced in the US in its early days. Having said that, we are-as is everyone else in the industry-waiting for GST to clear things out," said Nath.

Given the above fact, some companies are already working around such issues by making a shift to a complete hands-off marketplace model. However, such models are said to have negative impact on customers because not all sellers are equally equipped to handle the complexities of nationwide fulfilment.

Unlike the technology bubble, the eCommerce economy in India has many more economically viable models. 'Economically viable model' depends on how investors perceive it, and their return expectations and timing. In future, many new businesses will only operate with profitability in mind.

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